Earnings Call Transcript
HANCOCK WHITNEY CORP (HWC)
Earnings Call Transcript - HWC Q2 2022
Operator, Operator
Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. I will now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.
Trisha Carlson, Investor Relations Manager
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain Non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluca, Chief Credit Officer. I will now turn the call over to John Hairston.
John Hairston, President and CEO
Thank you, Trisha, and thanks to everyone for joining us today to discuss another solid quarter. The momentum we've reported the past few quarters continues, and we hope you agree it reflects a company well positioned for today's uncertain environment. As expected, the movement in rates served as a tailwind this quarter and helped us beat our targeted efficiency ratio of 55% well ahead of plan. Also as expected, the upward rate migration pushed our NIM back over 3% as earning assets repriced and deposit betas lagged. Core loan growth exceeded our expectations of over $700 million, more than offsetting this quarter's run-off in PPP loans. Improving line utilization and production in all geographic markets across our footprint, coupled with a strong showing in healthcare, real estate, and mortgage, were all contributors to the 13% linked quarter annualized growth. We are especially pleased to report that almost $150 million of the quarter's growth came from bankers and expansion markets across our footprint, particularly Beaumont, Dallas, and San Antonio in Texas, and Jackson in Mississippi. Even with the strong second quarter, however, we continued prior guidance for the year at 6% to 8%, but with a clear bias to the high end of the range. In Q3, we expect a moderation in pipeline and pull-through rate, followed by a rebound in Q4. So, moving onto deposits where we reported a 2% runoff. The drivers were commercial clients converting cash on their balance sheet into working capital, and some opted to use excess liquidity to pay down debt in light of increasing money rates. We saw normal seasonal reductions from public funds and consumer clients paying taxes, and there was a portion of migration elsewhere in pursuit of higher rates. There was relatively no change in our best-in-class deposit mix, with almost half in DDA and the other half in low-cost categories. Credit continued improving despite being at historically low levels last quarter. NPLs and criticized loans declined once again, and net charge-offs were actually a recovery for the quarter. As a result of this performance, we finished the quarter with a strong allowance at 1.55%. I'll begin my comments by saying we believe we are well positioned for today's environment. I would refer you to Slide 20 in our earnings deck to observe the rationale for that case. With that, I'll ask Mike to share any further comments.
Michael Achary, CFO
Thanks, John. Good afternoon, everyone. The second quarter was another solid quarter with net income of $121 million and EPS of $1.38 per share. The results were down slightly linked quarter, mostly due to a lower negative provision for loan losses as we complete our reserve release tapering. Compared to a year ago, earnings increased from $1 per share to $1.38 per share. As a reminder, the same quarter a year ago included $42.2 million or $0.37 per share of net non-operating items related to efficiency initiatives we undertook last year. The successful execution of those initiatives helped the company become more efficient and positioned us well for today's uncertain and challenging environment. Operating pre-provision net revenue or PPNR totaled $147 million, up $12.4 million or 9% linked quarter and up $9.7 million or 7% from a year earlier. Three operating themes we think drove our results in the second quarter included the impact of overall higher rates, the end of reserve releases, and higher operating expenses, mainly due to increased personnel costs. The movement up in rates was beneficial to our results as earning assets repriced, new loans and securities were added to the balance sheet at much higher yields, and the majority of our floors on loans reset, while we lagged in moving deposit costs up. We also shifted our mix in earning assets as we used excess liquidity to grow loans, invest in the bond portfolio, and fund deposit runoff. In addition, most of our remaining federal home loan advances were called during the quarter. As a result of this activity, our NIM for the second quarter widened by 23 basis points to 3.04%. June's NIM of 3.24% provides a better indication of how the rate moves and mix shift within the balance sheet is impacting our net interest income today. Even more important is our expectation and guidance that the NIM in July should begin the third quarter at around 3.35%. Please refer to Slides 7, 12, 13 and 18 in our earnings deck for additional information on the second quarter results and future expectations for NIM. Our asset quality metrics improved again this quarter, with NPLs and levels of commercial criticized loans down slightly to historically low levels. Additionally, we saw net recoveries of $700,000, and our ACL remained very strong at $339 million or 1.56% of loans, excluding PPP. We released $9.1 million of reserves this quarter and believe we have now seen the end of reserve releases. Expectations are that our ongoing provision levels for the next few quarters are likely to be zero or low as model scenarios become more pessimistic. Another driver for the quarter was higher operating expenses. While most expense categories were stable, personnel expense increased almost $8 million. As noted on Slide 15, there is some seasonality to this line item as annual merit increases are paid in April. This year the average raise was 3.25% and added $2.2 million for the second quarter's base salary totals. Incentive pay increased $3.5 million in the quarter as company and individual performance reflected a solid first half of the year. An additional day in the quarter increased the total by $1 million, and we had another $1.1 million of increase related to higher headcount and wages due to inflationary pressures. The increase in FTEs for the first half of this year has been primarily related to filling vacancies in the Consumer Bank with increases also in commercial banking, technology, and our corporate internship program. It's important to note that while expenses were up, the improvement in NII and fees more than offset the increase, resulting in an efficiency ratio of 54.95%, meeting our target earlier than expected, which takes us to guidance. Slide 17 and 18 are updates to our near-term and NIM guidance and reflect both the impact from past rate moves and our expectations for rates for the remainder of this year. Finally, a couple of closing comments on capital. Our TCE, while again impacted by OCI, did increase 6 basis points to 7.21%. Our capital levels remain solid with CET1 over 11% and leverage estimated to be up 30 basis points linked quarter. Again, a very solid quarter that's helped to position us well for today's environment. With that, I will turn the call back to John.
John Hairston, President and CEO
Thanks, Mike. Let's open the call for questions.
Operator, Operator
Thank you. The first question is from Kevin Fitzsimmons with D. A. Davidson. Your line is now open.
Kevin Fitzsimmons, Analyst
Hi, good afternoon, everyone. I wanted to ask about the deposit declines that you mentioned earlier, John, as we've seen some banks experiencing this. What are your thoughts on it? Additionally, concerning the ability to grow net interest income, it seems that over the past few years, NII growth has been supported by the balance sheet, while margins have been impacted by excess liquidity, and now that appears to be changing. Although I know you don't provide specific guidance on NII, do you feel confident that you can achieve NII growth driven by margin percentage, even if average earning assets are somewhat limited due to cash being drawn down? If I'm not framing this correctly, please clarify. Thank you.
Michael Achary, CFO
Yes. Hi, Kevin, this is Mike. I'll start answering the question and certainly John can add some color. But yes, I think you have that right. What we're expecting from this point for the rest of the year, if you look at our guidance, is really for deposits year-over-year to be kind of flat to slightly down. Now that implies over the course of the second half of the year for deposits probably to be down a bit from where they are now, so we're not expecting a lot of earning asset growth in the second half of the year. In fact, we still have the last of our home loan advances that will likely be called at the end of this month. So you could see some additional deleveraging in the second half of the year. But we absolutely expect the NIM to continue to widen, really with the tailwind of higher rates, and for NII to continue to grow as we go through the back half of the year, so those are things that we have high confidence around happening. And certainly as far as deposits go, again, the guide is really for deposits to be flat to slightly down. That's how we're thinking about the second half of the year with respect to NII and the NIM.
John Hairston, President and CEO
Kevin, this is John. I want to add that we have ample capacity to grow deposits, as both our retail and commercial franchises excel in this area. However, without a means to utilize that capacity moving forward, we are looking at it almost dollar for dollar. For us, allowing the loan deposit ratio to ease a bit for the sake of net interest income and overall earnings is more crucial than increasing what is currently a moderately excessive liquidity situation. This approach is about managing the balance sheet rather than a lack of capacity.
Michael Achary, CFO
And then the last thing I would add is just a reminder around the mix of our deposit base, it's absolutely tremendous. We certainly see ourselves holding onto that favorable mix as we go through this environment.
Kevin Fitzsimmons, Analyst
Yes, it's ironic that I’m discussing the reduction of excess liquidity as an issue, since we’ve identified it as a significant challenge for quite some time. This should be viewed positively. However, given how quickly this change occurred, faster than I anticipated, I wonder if it might speed up the deposit beta or reduce the lag in deposit pricing more than we would have experienced otherwise. This concern applies not just to our bank but to all banks, and I’m curious about its implications for future secure purchases as well.
John Hairston, President and CEO
Yes. So in terms of the second question first around the bond portfolio, I mean, if we just think about the composition of our earning asset base and how that's likely to be deployed in the second half of the year. I mean, you're right for the most part this notion of excess liquidity really has kind of played out. We're back pretty quickly to traditional ways of managing the balance sheet, not having all of that excess liquidity. So certainly, the focus is going to be continued on growing our loan book. We have guidance for additional loan growth in the second half of the year. And as far as the bond portfolio is concerned, we will probably grow a little bit from where it is right now. But I don't think you'll see a lot of net growth for the second half of the year in the bond portfolio, that's at least how we're looking at it now. And then your first question around deposit betas. Yes, they're starting off, I think, pretty low for most banks right now. I think most banks are following that same philosophy around, kind of, a controlled way of looking at deposit betas. But I certainly think that that’s going to pick up as we go through the back half of the year and especially if the Federal Reserve raises rates as expected. So I think that will play out probably more towards the fourth quarter, but we'll certainly see.
Kevin Fitzsimmons, Analyst
Okay, great. And one just quick question on the loan growth, I was just curious why you expected to moderate in the third quarter, but then to rebound in the fourth quarter? I'm assuming it’s some kind of seasonality, but just if you can add a little there? Thanks.
John Hairston, President and CEO
There is some seasonality involved. The main factor in the second quarter was strong, diverse growth across various geographies and specialties. The pull-through rate and the scaling of the pipeline early in the second quarter exceeded our expectations. As we incorporated price increases into our models, notably the 75 basis points increase in June and another anticipated 75 basis points in July, we noticed a significant drop in the fixed-rate pipeline for Q3. Assuming a 60-day average close for transactions that require appraisals, the pipeline work done in June reflects what we can expect in August. The guidance for moderation is due to competitors lagging in adjusting their pricing models for fixed-rate deals, especially since these adjustments only started to appear recently. Consequently, we have a shortfall in our pipeline for the middle of Q3, coupled with normal scheduled pay-downs of projects on the commercial real estate side. This situation is influenced by the pricing assumptions related to the 75 basis points increase. Instead of focusing solely on growth, we prioritize having the right pricing. This isn't due to a downturn in sentiment or a lack of demand; rather, it seems like there was a temporary bubble lasting about six weeks, leading to a pricing gap.
Kevin Fitzsimmons, Analyst
Okay, great. Thank you, everyone.
Michael Achary, CFO
You bet. Thank you for the questions.
Operator, Operator
Thank you for your question. The next question is from the line of Brett Rabatin with Hovde Group. Your line is now open.
Brett Rabatin, Analyst
Good afternoon, everyone. You mentioned deposit betas, and I'd like to discuss how the margin is expected to progress from here. I appreciate the guidance of 3.35% for July; that math makes sense. Considering the upcoming rate hikes, could you share your expectations on how quickly the deposit betas might increase? Specifically, when do you foresee the deposit betas beginning to hinder the upward movement of the margin in the next six months?
Michael Achary, CFO
Hey, Brett, this is Mike. I'll give you a few comments related to that question. So related to the NIM, I think overall just given the trajectory of what's happened with rates and what's likely to happen, not only at the end of this month, but as we move into September, and then the potential for the Fed to continue increasing maybe at a slower rate in November and December, I think we'll see the majority of the margin expansion that we're anticipating for the second half of the year in the third quarter. Not to suggest that we won't see any in the fourth quarter. I believe we will, but all things equal, we will see most of it in the third quarter. I also think by the time we get to the fourth quarter, we'll begin to see the full impact of deposit betas. Not to say there won't be some impact in the third quarter, but I think, again, as we look at the second half of the year, that impact is probably going to be weighted more towards the last part of the year. So hopefully that's helpful.
Brett Rabatin, Analyst
Yes, that's Mike, that's very helpful. Appreciate that. And then just wanted to talk about the guidance for the efficiency ratio. You kind of have it staying below 55%, but it would seem like it could migrate based on even the guidance for revenue and expenses from here towards 50%. Is there a reason why you didn't want to give any different guidance on the efficiency ratio in terms of where it trends in the next six months to a year?
Michael Achary, CFO
No. No specific reason at all. We just felt like given the detail of the guidance that we gave on Slide 17 above the efficiency ratio, that certainly the math would take that number down to the level that you suggested. So it was really kind of a given as opposed just specifically calling out there.
Brett Rabatin, Analyst
Okay, great. And then maybe just. I'm sorry, go ahead, John.
John Hairston, President and CEO
I'm sorry, I stepped on you, Brett. The bottom of Page 18, that last bullet point might be one that you are looking for in the earlier question around just what the NIM expansion is as increases go up in timing. So I think you can back into where you're headed with that bullet point.
Brett Rabatin, Analyst
Okay. I was trying to determine the assumption for the deposit beta on Page 18. Everything you've shared has been very helpful. Lastly, I was considering the discussions around recession and its potential impact on our balance sheets and growth. How are you viewing the opportunity for market share shifts during a recession? What do you anticipate happening assuming we enter a recession in '23? How will you address that in terms of growth or stagnation?
John Hairston, President and CEO
I'll start by addressing your question, and others can join in as well. Regarding our growth strategy, as outlined on Page 20 of our presentation, we are committed to continued hiring. There is a substantial pool of talent available, and we have a strong alignment between our treasury function and line leadership. This synergy extends to our credit leadership as well. The incoming bankers we've engaged with recognize this dynamic, which has contributed to the success of new hires over the past year to year and a half. With this success as our foundation, we anticipate further opportunities ahead and plan to maintain our hiring strategy unless circumstances change. I believe our approach won't necessarily slow down in a recession; history shows there are always winners and losers in those periods. If we experience further disruptions, it may create opportunities for growth. In a recessionary environment, we would be focused on gathering deposits while continuing to hire loan-generating personnel, similar to previous cycles. Starting from a strong position with a robust loan loss reserve and low credit risk, we are well-prepared. Hence, we will proceed with our current strategy but will prioritize protecting our deposit base, aware that interest rates may begin to rise as we strive to maintain our core relationships. Did I address your question, or do you need further clarification?
Brett Rabatin, Analyst
No, that's really helpful, John. I appreciate all the color.
John Hairston, President and CEO
You bet. Thanks for the question.
Operator, Operator
Thank you for your question. The next question is from the line of Jennifer Demba with Truist Securities. Your line is now open.
Jennifer Demba, Analyst
Thank you. Good afternoon. Just curious on your share repurchase appetite. At this point, I know you've got about 2.7 million shares left on the authorization?
Michael Achary, CFO
Yes, Jennifer. This is Mike, so that will absolutely continue, I think, in the second half of the year. We've always described our appetite as being opportunistic. Admittedly, we probably bought more shares in the second quarter than we expected, but certainly given the amount and level of market disruption, we saw that opportunity to do so. We will continue to be opportunistic in the second half of the year, just maybe not at the same level that we bought shares back in the second quarter.
Jennifer Demba, Analyst
Okay, thanks. And back on the hiring topic for just a second. Are there any particular markets where you're seeing relatively more opportunities right now?
Michael Achary, CFO
That's a good question, Jennifer. Our focus is really on the growth markets simply because as we hire teams and individuals, the book in areas of the company where the natural expected organic growth rate is higher. To the extent we can find folks there, particularly teams, we'd like to take advantage of that. But here in the last quarter, you noticed the mix of people is a little different, with about half the people we hired being in those growth markets and about half in the core. The folks in the Louisiana, Mississippi, Alabama area of the footprint that were added were really more opportunistic hires. I would probably say it's going to be, by the time you look at one year’s view, probably 80% or so of those hires will be in very high growth markets where we have low market share but very good opportunity.
Jennifer Demba, Analyst
Thank you.
Michael Achary, CFO
Yes, ma'am. Thanks for the question.
Operator, Operator
Thank you for your question. The next question is from the line of Casey Haire with Jefferies. Your line is now open.
Casey Haire, Analyst
Hi, good afternoon, everyone. My question is about the bond book. With deposit growth being challenging during a Fed tightening cycle, what opportunities do you see to fund loan growth through your bond book, which makes up 27% of the balance sheet? How willing are you to reduce that portfolio as a percentage of the balance sheet?
Michael Achary, CFO
Casey, this is Mike. So we've run the bond portfolio probably as low as maybe 20% to 22% of earning assets. Admittedly, 27% is probably on the high end. Our sweet spot probably is around 25% or so. Those are just kind of broad parameters. But again, giving that the intent right now based on how we look at the second half of the year is to grow the bond book, I would say modestly from where it is now. That's kind of how we think about that.
Casey Haire, Analyst
Okay, understood. And then just on the indirect book, which is amortizing, is that due to less demand or just less appetite on your part or a combination of both? And how big is that portfolio?
Michael Achary, CFO
It's a business we exited or stopped new production in about six to eight quarters ago, likely the year before last. There's roughly $160 million less in the book, and it's been decreasing from $40 million a quarter; it's now down to around $20 million. I think we have probably three more quarters of that, and the amortization will become minimal. In terms of strategy, the risk-adjusted returns started to narrow, and we anticipated higher prices along with many different features being added to the principal of the note. We began to see losses per instrument that didn't seem appealing, especially if we entered a credit cycle, so we decided to exit and use that liquidity for other opportunities. That's why it's amortizing.
Casey Haire, Analyst
Got you. Thank you.
Michael Achary, CFO
You bet. Thanks for the question.
Operator, Operator
Thank you for your question. The next question is from the line of Brad Milsaps with Piper Sandler. Your line is now open.
Brad Milsaps, Analyst
Hey, good evening.
Michael Achary, CFO
Hi, Brad.
Brad Milsaps, Analyst
Mike, I just wanted to follow up on Casey's bond question. Just curious, it looked like the yield stayed relatively flat linked quarter that you're doing some reinvesting there not buying a lot of new, but just could you comment on that, the ability to see that maybe some lift there as well, or is that kind of, we think, sort of stuck in this range?
Michael Achary, CFO
No, thanks for the question, Brad. No, I don't think we're stuck in that range, but the yield on the bond portfolio was up 2 basis points quarter-over-quarter. We did buy about $472 million of bonds that contributed obviously to the growth, as well as reinvested any maturities or paydowns. The new bonds that we bought came on at $342 million, so certainly a very, very nice yield. I think part of the issue is a lot of those purchases tended to happen later in the quarter, so the impact in the second quarter was a little muted. I think you'll see a little bit more of a significant yield pickup in the coming quarter.
Brad Milsaps, Analyst
Great. Very helpful. And then just a follow-up on the loan beta discussion. Is there any reason this cycle you wouldn't think you would see a 48% loan beta as you saw last cycle? Just the rate increases are coming so quickly. Do you think it will be difficult to pass along, or might some of that be competed away, or do you think you can achieve that same beta that you saw last time around?
Michael Achary, CFO
Yes, absolutely, on the loan book. Our intent is to have our loan beta match the last time, when we were in a rate cycle. Really right now, we have no reason to believe that it would be any different. And so far, our experience is proving that out, but obviously we're early.
Brad Milsaps, Analyst
Sure, and thank you for that. And maybe just one final one for me. There are a lot of kind of puts and takes on fees this quarter. Do you kind of have the seasonal trust lift from tax prep fees? A couple of things went the other way. It looks like the guidance would imply that quarterly fees sort of stay flat from here. Can you guys kind of discuss just a little color on that? I assume you think there is some offset coming to maybe the trust, the seasonal trust fees coming back down. But just kind of curious, any additional color there would be great? Thank you.
John Hairston, President and CEO
Thank you for your question and observation. In the second quarter, our cards, investments, and trust business performed exceptionally well. The account services number was slightly lower, but we anticipate it will rebound in the third quarter. Overall, we expect that unless there’s a significant decline in trust business, affected by seasonal tax planning fees, the account services should recover or perhaps do even better. Your overall assessment is correct; the delivery may vary. However, the secondary mortgage category faces challenges in the third and fourth quarters due to the current market conditions. There is still interest and activity, but with rates above 6%, our sales have been somewhat subdued.
Brad Milsaps, Analyst
Great. Thank you, guys. Appreciate all the color.
Operator, Operator
Thank you for your question. The next question is from the line of Michael Rose with Raymond James. Your line is now open.
Michael Rose, Analyst
Hey, good afternoon, everyone. Thanks for taking my questions. Just two quick ones, just on credit, so things are really good right now. Any sort of signs on the horizon that would give you any sort of pause? I know you guys have done a lot of de-risking, getting out of energy scaling back on the consumer that gave you trouble a couple of years ago. Losses have been really low the past four quarters. NPA's are down substantially; criticized, classified is pretty stable to trending lower. Any reason to think that we would see, at least in the near-term, a pickup in charge-off levels at this point?
Christopher Ziluca, Chief Credit Officer
Yes. Hi, Michael, it's Chris Ziluca. Currently, our asset quality is at a historically low level, and it seems unlikely to drop much further since we're already at the bottom. Charge-offs usually lag behind current trends, and we don't anticipate seeing many in the near future. The situation will depend on how the current environment, including inflation and supply chain challenges, affects our customers and whether a recession might begin to develop. However, we've conducted thorough due diligence on our portfolio and have established routines to monitor the situation closely. We feel confident in our ability to identify and address issues early in the process.
Michael Rose, Analyst
That's helpful. Maybe just one final one for me, just on the three-year CSOs, the footnote around not including future rate increases was not in the slide deck this quarter. I didn't know if there is anything to read into it. Obviously, if you look at the futures curve, I mean, there is some expectation that we could see some rate cuts. Any plans to update those? I know you typically do that annually. And then just wanted to confirm that those targets do not include rate increases?
Michael Achary, CFO
Yes. Michael, this is Mike. I'll confirm for you that they continue to not include any assumptions around higher rates. As far as updating the CSO, you're correct; we typically update those on an annual basis. So you'll certainly see an update when we release earnings after the fourth quarter.
Michael Rose, Analyst
Okay, great. Thanks for taking my questions.
Michael Achary, CFO
Okay.
John Hairston, President and CEO
Thank you.
Operator, Operator
Thank you for your question. The next question is from the line of Catherine Mealor with KBW. Your line is now open.
Catherine Mealor, Analyst
Thanks. Good evening, everyone.
John Hairston, President and CEO
Catherine, how are you?
Catherine Mealor, Analyst
Good. My follow-up question is regarding the size of the balance sheet. You mentioned that you expect PPNR to increase by 16% to 18% year-over-year. As I consider the various components, such as where margins are headed in the latter half of the year, loan growth, and fees and expenses, the one aspect that seems unclear is the size of the balance sheet. Is it reasonable to assume that within that PPNR projection, the securities portfolio will remain relatively stable while we anticipate a notable reduction in excess liquidity? Do you have an idea of what level the excess liquidity might reach by the end of the year, which is factored into that guidance?
Michael Achary, CFO
Yes, Catherine, this is Mike. As I mentioned before, we've kind of returned to more traditional ways of managing the balance sheet, which means without the benefit of all the excess liquidity that we had going into the quarter. So we deployed a lot of that excess liquidity this quarter. We started with the better part of $3.9 billion and ended with just under $900 million. Of course, a bunch of that was deployed in terms of growing loans. We continued to grow the bond book, we funded deposit outflows, and we had the better part of $1 billion of our home loan advances called during the quarter. That brought us to the level mentioned at June 30th, and from there going forward, I think the broad assumptions you articulated absolutely make sense and are consistent with how we're looking at the second half of the year. The excess liquidity, I think probably over the course of the next quarter will be largely gone, and the balance sheet, again, at that point I think kind of operates in a more traditional fashion, potentially with some level of borrowed funds by the end of the year.
Catherine Mealor, Analyst
Great. That's helpful. And then if we think about the June margin, what were loan yields for the month of June?
Michael Achary, CFO
I don't have that with me again for the quarter; it was 3.86%. Certainly, I think the information we gave around the month of June shows continued margin expansion, as well as kind of what we're expecting in the month of July and the 3.35% or so.
Catherine Mealor, Analyst
Okay, I understand. I'm trying to determine how much of the 3.35% we expect to see in Q3 is due to the full quarter's impact of excess liquidity versus the changes in loan yields. Also, did the securities deduction have a significant impact this quarter?
Michael Achary, CFO
Yes, a major part of it is really, you know, LIBOR resetting after the big rate hike that recently happened.
Catherine Mealor, Analyst
Okay. I think everything else was in there. Thank you so much. Great quarter.
Michael Achary, CFO
Thank you.
Operator, Operator
Thank you for your question. The next question is from the line of Christopher Marinac with Janney Montgomery. Your line is now open.
Christopher Marinac, Analyst
Thanks. Good evening. Mike and team, I wanted to ask about the scenario where the floors all expire next year once the fed funds rate reaches 3.50%. Can customers take on floors today? What can you sort of get through, and how do you envision the environment where the Fed stops raising rates or perhaps rates start to go back down?
John Hairston, President and CEO
Yes, that's a great question. It's impressive to think that just six or eight months ago we were speculating on when interest rates would start to rise. Now, we're discussing the possibility of reaching our floor levels in the next quarter. We've had to quickly assess what actions we can take. Recently, we've been able to establish floors, but we haven't had extensive discussions with clients to set expectations for 2023. I should be able to provide a clearer answer in a couple of months, once we reach the end of this quarter. We're aiming to establish something, and while it's a reasonable discussion considering current rates, it's still too early to make any definitive statements.
Christopher Marinac, Analyst
That's fair, John. And I guess just a general question related, do you presume that the general mix between floating and variable would be the same, or do you think you're able to perhaps influence that mix over these next few quarters?
John Hairston, President and CEO
If you look at the breakdown between variable and fixed rates on page seven of the deck, you'll see data from the last five quarters showing the proportions of fixed and variable loans. In the second quarter of this year, we recorded the highest percentage and number of variable loans, while the fixed amount had the lowest percentage and was one of the lower figures. This indicates a clear trend towards a higher mix of variable loans. Historically, we are currently at the highest variable rate as a percentage of our portfolio. This strategy has been intentional and is performing well, as evidenced by our NIM expansion. Moving forward, I anticipate that the third quarter will likely reflect an even stronger trend, particularly considering the competitive pricing we experienced in June and its impact on our pipeline. As for the fourth quarter, it's likely to revert to the average levels of the previous three quarters. This prediction involves some speculation and depends significantly on our hiring decisions, the locations of those hires, and the progress we make in marketing to disrupted organizations for variable rate loans. We aim to maintain a high percentage of variable loans and will hedge against potential risks as we enter 2023 and 2024.
Christopher Marinac, Analyst
Great. That's really helpful, John. I appreciate that. Just the last quick one for Mike is just on the CET1 capital ratio. With buybacks and future growth, would that number come down, or do you imagine that 11% level can stay stable?
Michael Achary, CFO
Absolutely. We believe that we can keep that level at 11% or higher as we go forward through the second half of the year. The reason it was down slightly quarter-over-quarter was really an increase in our risk-weighted assets as we traded excess liquidity for loans primarily. Given the excess liquidity probably played out, you won't have that same trade going forward, but to answer the question, 11% plus is absolutely where we think we'll operate that ratio at going forward.
Christopher Marinac, Analyst
Good. Thank you all very much for the time today.
John Hairston, President and CEO
You bet. Thank you for the questions.
Operator, Operator
Thank you for your question. The next question is from the line of Matt Olney with Stephens Inc. Your line is now open.
Matt Olney, Analyst
Yes, thanks for taking the question. I just want to go back to the deposit discussion. On deposit, John, you gave us good guidance on deposit balances. Help us appreciate the mix of deposits and directionally what you expect. I think the NIB balances are now 49% of total deposits. If we go back a few years ago, it was 39%, so quite the improvement over the last two or three years. We’d love to hear more about your expectations of maintaining that mix of NIBs around these current levels? Thanks.
John Hairston, President and CEO
Sure. I'll start, and Mike can jump in. Historically, I think you called out the correct number a few years ago. When we talk around the table, we think that will settle as the remnant of the Ida Hurricane money is spent and the remnant of the PPP liquidity is either invested in working capital or used for some other purposes. It would be conceivable to see that mix in the mid to low-40%. At the same time, we continue to add a good bit of variable rate loan business, and when we do that, we expect to get operating accounts along with it, and the bulk of all that is in DDAs. So, I think a four handle is a reasonable expectation. It may not stay at 49.5% but a mid-40% is something that we would love to target as we move forward. Mike, any comments?
Michael Achary, CFO
Yes, I agree completely, John. I think the 49%, 50% is extraordinarily high and may not be sustainable in a higher rate environment. A lot of the dynamics that John just described probably depend on how high rates go and how long before they start to come down again, down the road. But certainly believe and think that when it's all said and done through this rate cycle that we are somewhere, I don't know, let's say 42% to 45% somewhere in that range, but also in the days when we ran 39%, we had a little bit less density in the C&I variable rate book. We have more clients, more markets to generate those types of clients, and more bankers in those markets than we had just a few years ago. So I'd be disappointed if we returned all the way back down to where we were before, given the change in the book. I would expect that enhancements in the loan book will generate a better mix overall in deposits as we get to a more normal cycle season. Does that make sense?
Matt Olney, Analyst
And John, a follow-up on that. Yes, that makes sense. You mentioned the insurance proceeds as one of the impacts there. Are you seeing the insurance proceeds move out yet, and if not, when do you expect to see more of that impact?
John Hairston, President and CEO
We are, and not to get too far into the geographic leads, but the storm really hit in the lower parishes of Louisiana. The bulk of the real devastation, where you see buildings destroyed and that sort of thing, those take two or three years for that liquidity to flow out. The impact of the storm in New Orleans and Jefferson Parish proper was really tied more to rooftop damage and that sort of thing that gets repaired, and so I would say a 12-month period. Does that make sense? So the chunk of it that's in New Orleans is largely already spent, and the chunk of it that is down in Homeland area, as we call it the lower parishes, is still underway and probably will go another year, year and a half.
Matt Olney, Analyst
Okay, that's helpful. Thank you guys.
John Hairston, President and CEO
Okay. You bet. Thank you.
Operator, Operator
Thank you for your questions. There are no additional questions waiting at this time, so I'll pass the conference back to John Hairston for closing remarks.
John Hairston, President and CEO
Thanks, Matthew, for running the call, and thanks to everyone for your interest and dialing in late in the day after a long day. We hope you have a terrific evening, and we look forward to seeing you on the road.
Operator, Operator
That concludes the conference call. Thank you for your participation. You may now disconnect your lines.